I recently came across this site, which allows the user to calculate long run returns and risk in the SP500. As I calculated the data I also decided to to run my own calculations on the 10 Year Treasury to get an idea of comparable risks and returns. I was quite surprised by what I found.
If we look at the time period from Jan 1, 1871 to Dec.31, 2009, we see that the SP500 had a compound annual growth rate (CAGR) of 8.89% and a risk of 18.94%. From Jan.1, 1962 to Dec. 31, 2009, the CAGR for the SP500 was 9.32% with risk of 17.56%.
Now for the Treasuries; from Jan. 1, 1962 to Dec. 31, 2009, the 10 yr note returned 6.47% with risk of 2.55%. Data for treasuries was not available for the 1871 to 2009 period.
This means that if an investor put his or her cash into stocks rather than bonds, they would have gained 2.85% more on their stocks relative to bonds, from 1962 to 2009. The risk in stocks, however, was approximately 7 times more than bonds. Mandelbrot and Taleb would surely argue that the risk in stocks was probably even greater than these calculations suggest. Here is the point, was the 2-3% extra return in stocks worth it when we look at how much more risk was taken in order to achieve that extra return?
One last point, if we look at the “real,” inflation adjusted returns, the returns were even smaller, but the question remains. What do you think?